How to Play the Bottom in Gold

07/03/2013 7:00 am EST


L.A. Little

Contributing Editor, Minyanville

Gold marked the worse quarterly decline in the second quarter since the mid-70s, but LA Little of makes the case for why now is a good time to buy.

Back in late May I talked about a safer way to trade gold, capitalizing with a spread between a stronger gold stock and the weaker metal itself. The idea was centered on the notion that the spread was stretched about as far as it could go, and that when gold finally bottomed out, the spread would begin to narrow. It’s hasn’t narrowed that much, but then gold hasn’t found anything that resembled a bottom of late.

With Friday’s reversal bar and other longer-term signals, it now appears that a bottom is in on gold near term. If true, then I expect the spread will narrow much more in the days, weeks, and months to come. That trade isn’t too late by a long shot.

Take a look at the turnaround on Friday with an engulfing candle reversal.

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With nothing else to go on, the reward-to-risk of nothing more than a bounce trade is tantalizing here as the odds are clearly stacked in the buyers’ favor short term, but it’s not just this reversal of the selling that one has to go on. The long-term picture is favorable, too, for a good bounce at a minimum and more likely something more as seen here.

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On this chart, notice how volume has disappeared as price has fallen, suggesting that the sellers are less willing to sell as price depreciates. That’s an exhaustion sign on the sell side.

Although buying gold outright a month ago didn’t make sense, it does now. The spread trade is still the safer way to play this bounce, but an outright long position is also favorable now—finally. If you are like me, you are doing both!

By LA Little, Contributor,

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